Telefonica Brasil: A Buy Opportunity Is Calling

| About: Telefonica Brasil, (VIV)

Summary

Telefonica Brasil SA reported strong financial results in the fourth quarter of 2015, surpassing analysts’ estimates on both the top and bottom line.

A significant recent upturn in share price from a lifetime low spells a coming long term uptrend.

The company is increasing its market leadership and number of customers in the mobile, data and postpaid segments of the Brazilian telecom market.

Only 13% of the market in Brazil uses 4G devices. Because 4G customers typically use 86% more data than 3G customers, 4G uptake increases promise rising corporate revenues.

The Olympics, commencing on 5 Aug., 2016, will produce a boost for the Brazilian economy in general and national and international telecommunications companies in particular.

Telefonica Brasil SA (NYSE: VIV) is a provider of telecommunications services. It offers fixed wire telephone services in the state of São Paulo and mobile telephone services throughout Brasil. Company services cover public telephones; intraregional, interregional and international long distance voice services; data services and broadband services; pay tv through direct to home, satellite and land based wireless technology; multichannel multipoint distribution service; network services with interconnection and facility rental; and multimedia communication services. The company has more than 90 million customers.

Telefonica Brasil was formed on May 22, 1998, and is headquartered in São Paulo. It has a distribution network of 300 of its own stores and 1,800 physical points of sale where customers may purchase credit for prepaid phones. The company was originally formed as part of Telebrás, the state owned telecom monopoly. In 1998 Telebrás was unmerged and privatized. In 2012 the company began to market its services under the Vivo brand.

Vivendi SA in July 2015 sold its 4% stake in Telefonica Brasil for $877 million in order to concentrate on its European operations. Meanwhile Telefonica Brasil has launched successful postpaid and prepaid data plans like Vivo Sempre and Vivo Ilimitado, and intends to introduce more such marketing programs going forward. These efforts are drawing more customers, and in turn producing subscriber growth and greater data usage.

Sao Paulo is the economic hub of Brazil, its most populous state, and the state that produces one third of Brazilian GDP. Sao Paulo is the largest economy in South America, and is second only to Mexico in Latin America. It possesses two major international airports and approximately 100,000 people pass through São Paulo-Guarulhos airport each day. The airport connects Brazil to 28 countries, and has a cargo terminal which is South America's largest and is second only to that of Mexico City in all of Latin America.

Telefonica Brasil's share price achieved a high of $46.83 in June 2011 before declining to an all time low of $7.72 in January 2016. This extended decline was to a distinct degree prompted by capital expenditure undertaken by the company to improve growth and increase market share. The number of the company's IT systems is being reduced from over 30 to a single converged solution to lower operating costs. Capital expenditure in turn impacted earnings in the short term, but is now entering its payoff period.

As the share price is presently near its all time low, it brings the advantage of reducing risk when compared to the upside of the long term price target of $45.00, and provides an asymmetric return profile in a multiyear play. The driver of increased share price will be improved earnings over the proximate period as a result of the market factors described, upgraded corporate efficiency and lower operating costs. These considerations began to come to the fore in the last quarter of 2015.

In the fourth quarter net operating revenues were $2,799 million, up 3.4% year over year. Quarterly EBITDA was $892.5 million, giving an increase of 5.9% year over year. EBITDA margin was 31.9% versus 31.1% in the previous year's quarter. Total mobile revenue rose 3.3% year over year to $1,666.3 million. This increase was primarily driven by a rise in data and value added services revenues and higher handset sales. Postpaid subscribers increased 9.6% year over year to 31.074 million.

Fixed line total revenue in the quarter increased 3.5% year over year to $1,131.5 million. Pay tv revenues surged 21.3%, and broadband revenues increased 6.9% year over year. Total fixed access lines were 23.559 million, showing a 0.8% year over year increase. Fixed broadband customers were 7.114 million, a rise of 3.6% year over year. The pay tv subscriber base grew 9.7% year over year to 1.788 million. Quarterly data average revenue per user was up a substantial 39% to $3.43.

At the end of 2015 Telefonica Brasil held cash and cash equivalents of $1,387.6 million, up 13.7% from the end of 2014. The company's price/earnings ratio is currently 17.05, and market capitalization is $18.30 billion.

Conclusion and Projected Valuation

Since announcement of the positive last quarter results for 2015, Telefonica Brasil's share price has bottomed out of its decline begun in 2011 and commenced a nascent uptrend that in a multiyear time line should see it projected to $45.00 and above. Detailed structural market factors, building on the company's previous marketing success, and forward corporate evolution bringing lower operating costs and increased net earnings reinforce this view.

The added boost of the Olympics can only augment the company's financial performance, both in the near term and the medium term, from ongoing business relationships developed as a result of the games.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VIV over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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